High Court quashes transfer of file from one ITO to another time spent in litigation not excluded from limitation : AP High Court

January, 30th 2008

TheHigh Court stays the transfer of a file from one ITO to another; the transferred ITO ignores the High Court order and proceeds with the assessment. Later on the High Court quashing the transfer, the old ITO proceeds with assessment. Tribunal rules that it is time barred; High Court concurs.

The Income Tax Appellate Tribunal, Hyderabad Bench, by its order dated 23.01.1995, referred the following question, which according to it covered the controversy raised in the four questions proposed by the Revenue, for the opinion of this Court under Section 256(1) of the Income Tax Act:

Whether on the facts and circumstances of the case, the Tribunal, is right in holding that the extended limit as provided under S.153(1)(b) of the Income Tax Act, 1961 is not available in this case

The assessee is a company carrying on business in trading of steel bars and hiring of cylinders etc. On 24.02.1987, a search was conducted under Section 132 of the Income Tax Act, both in its business premises and the residential premises of its directors. According to the department, valuable incriminating material was found including introduction of certain bogus credits by the assessee. The jurisdiction over the assessee's case was originally with the Income Tax Officer, Company Circle, Hyderabad before whom the assessee had filed a return of income, for the assessment year 1986-87, declaring a total income of Rs.1900/-. According to the Revenue, the assessee was one among a group of companies whose activities were largely confined to Visakhapatnam. In order to facilitate a detailed and coordinated investigation the Chief Commissioner of Income Tax, Hyderabad , under Section 127(2) of the Income Tax Act, passed order dated 28.07.1988 transferring the assessees case from the file of the Assistant Commissioner, Company Circle , Hyderabadto the file of the Asst. Commissioner (Investigation), Visakhapatnamwith effect from 01.08.1988.

The Assistant Commissioner, Hyderabad , vide letter dated 22.08.1988, intimated the assessee that its case had been transferred to the file of the Assistant Commissioner (Investigation), Visakhapatnam. The assessee then filed W.P.No. 15267 of 1988 before the High Court seeking to have the said transfer order quashed. The High Court by its order in W.P.M.P. No. 19396 of 1988 dated 10.10.1988, suspended the operation of the said transfer order until further orders.

Despite the interim order of the Court, the Assistant Commissioner (Investigation), Visakhapatnamcompleted ex parte assessment on 31.03.1989. Aggrieved thereby, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) challenging the jurisdiction of the assessing officer to make the assessment as also the correctness of the additions made by him. During the pendency of the appeal, W.P.No. 15267 of 1988 was allowed by the High Court on 13.12.1989 and the order of the Chief Commissioner of Income Tax transferring the assessee's case from Hyderabad to Visakhapatnamwas quashed.

Subsequent to the decision of the High Court, the Commissioner of Income-Tax (Appeals), Visakhapatnam, by his order dated 07.02.1990, disposed of the appeal annulling the assessment order dated 31.03.1989 passed by the Assistant Commissioner (Investigation), Visakhapatnam. Thereafter, the assessee's case was transferred back to the Assistant Commissioner, Company Circle, Hyderabad vide proceedings of the Chief Commissioner of Income Tax dated 20.02.1990. The Assistant Commissioner completed the assessment, under Section 144 of the Act, on 07.05.1990.

Aggrieved thereby the assessee preferred an appeal, before the Commissioner of Income Tax (Appeals), not only on the additions made by the Assessing Officer but also on the validity of the very assessment on the ground that the time limit, for completing the assessment, expired on 31.03.1989 much before 07.05.1990 when the assessment order was passed. The Commissioner of Income Tax (Appeals), in his order dated 28.01.1991, rejected the assessee's contention with regards limitation on three grounds.

1.that the Commissioner of Income Tax (Appeals), Visakhapatnam, in his order dated 07.02.1990, while annulling the assessment order, had set aside the assessment in relation to the additions for de-novo consideration on merits by the appropriate assessing authority.

2.that the assessment order dated 07.05.1990 was not barred by limitation in view of clause (ii) of Explanation 1 to Section 153(3) since the period, during which the order of interim stay passed by the High Court was in force, was required to be excluded while computing the period of limitation.

3.that it was a case where penalty proceedings had also been initiated against the assessee under Section 271(1)(c) of the Income Tax Act and in that view of the matter the limitation got extended to eight years as per clause (b) of sub-section(1) of Section 153 of the Income Tax Act.

The Commissioner of Income Tax (Appeals), however, observed that though the assessment was not barred by limitation, the assessment was completed hurriedly to save limitation resulting in denial of reasonable opportunity to the assessee. Consequently the assessment order was set aside and the matter was restored to the assessing officer to redo the assessment after giving reasonable opportunity to the assessee and to carry out the directions given by him in the appellate order for the assessment years 1986-87 and 1987-88.

On further appeal by the assessee the Tribunal, in its order dated 25.05.1993, held that the assessment order dated 07.05.1990 was barred by limitation and not saved by clause (ii) of Explanation 1 to Section 153(3) of the Income Tax Act. The Tribunal held that the normal period prescribed under Section 153(1)(b) expired on 31.03.1989 and, even if any notice was issued under Section 271(1)(c) after expiry of the period of limitation, it would be of no avail to the Revenue and it would not bring the case within the scope of Section 153(1)(b). The Tribunal relied on Commissioner of Income Tax Vs. Surjit Pal Singh in this regard. The Tribunal observed that the passing observations of the Commissioner, Income Tax (Appeals), Visakhapatnam in his appellate order, arising out of the assessment made by the Assistant Commissioner (Investigation) Visakhapatnam, could not be treated as a direction contemplated under Section 153(3)(ii) and his action of remitting the matter, for de-novo consideration by the appropriate authority, did not save limitation. The Tribunal relied on Dy. Director of Inspection (Intelligence) Vs. Vinod Kumar Didwan to hold that if, during the pendency of the writ proceedings before the High Court, the assessment got barred by limitation the assessee could not be faulted and, therefore, the impugned order of assessment dated 07.05.1990 was barred by limitation.

So the question of limitation is before the High Court. The High Court observed,

1.It is clear from Explanation 1(ii) of Section 153(3) that the period, during which assessment proceedings are stayed by an order of Court, is required to be excluded from the period of limitation.

2.What was stayed/suspended by this Court, in its order in W.P.M.P. No. 19396 of 1988 dated 10.10.1988, was the order of the Chief-Commissioner of Income Tax dated 28.07.1988 transferring the assessee's case from the file of the Assistant Commissioner, Company Circle , Hyderabadto the file of the Assistant Commissioner (Investigation), Visakhapatnam.

3.The order transferring the case was suspended and not the assessment proceedings themselves. While the consequence of suspension of the order, of the Chief-Commissioner of Income Tax, Hyderabad dated 28.07.1988, was that the Assistant Commissioner (Investigation), Visakhapatnam was precluded from making the assessment, it did not prevent the Assistant Commissioner, Company Circle, Hyderabad from passing the assessment order within the period of limitation on or before 31.03.1989.

4.As rightly held by the Tribunal, Explanation I (ii) of Section 153 (3) has no application to the case on hand as the interim order of this Court dated 10.10.1988 did not amount to stay of assessment proceedings.

5.It is well settled that observations in a judgment cannot be read out of context as laying down the law and must be examined in the light of the facts which fell for consideration therein.

6.The interim order passed by this Court on 10.10.1988 would only mean that the impugned order would not be operative from the date of passing of the stay order and does not mean that the order had been wiped out from its existence. The interim order, suspending the order of transfer dated 28.07.1988, did not bar the Assistant Commissioner ( Company Circle), Hyderabadfrom passing the order of assessment.